Covered Bonds

Eurozone banks recorded their second highest take up in the latest offering of targeted longer-term refinancing operations (TLTROs) this week. The region's lenders do not appear to be in a hurry to replace ECB financing with capital market issuance.

National Bank of Canada’s €500m seven year covered bond issued on Thursday, showed that a positive spread to mid-swaps has a greater impact on demand than a positive yield.

Mounting concerns over rising rates resulted in a fair degree of price sensitivity for a rare 20 year covered bond issued on Tuesday by Bawag, the Austrian lender. But with a little new issue premium, demand was still good.

Všeobecná úverova banka (VÚB) issued a €500m five year covered bond on Wednesday at the tightest spread for any issuer from Slovakia.

A debut green covered bond from OP Mortgage Bank, and a green Pfandbrief from Berlin Hyp, that were issued this week priced through mid-swaps and tighter than any other covered bonds issued so far this year, yet they still managed to attract broad and diversified demand.

OP Mortgage Bank’s green debut €750m 10 year covered bond was priced on Thursday in line with where a Pfandbrief might have been expected to come. At the same time, National Bank of Canada made a rare appearance with a €500m seven year that was priced well inside fair value.

Všeobecná úverova banka (VUB) issued a €500m five year covered bond on Wednesday at the tightest spread for any issuer from Slovakia. At the same time the Mortgage Society of Finland issued a sub-benchmark sized 10 year at close to fair value. The resounding outcomes for both deals partly reflected the generous spreads on offer. At the same time OP Mortgage Bank has announced plans to issue its debut green covered bond.

Covered bonds and RMBS secured on green mortgage collateral do not deliver issuers much of a saving over conventional issuance in those markets, but favourable regulatory initiatives stand to tip the balance towards an increase in green mortgage production. Secured issuance will be the best way to fund this activity — expect green RMBS and covered bond issuance to surge.

The volatility that defined the first week of March for SSA issuers meant the paid higher new issue premiums than before — an average NIP of 1.5bp. But the same metric fell to 0.71bp last week, suggesting growing investor comfort that will have been buoyed by the ECB’s decision last week to step up its Pandemic Emergency Purchase Programme to meet rising government bond yields — and even those numbers were well below last year’s average SSA NIP of 2.6bp.

Berlin Hyp’s six year green Pfandbrief and Bawag’s 20 year vanilla covered bond attracted strong demand on Tuesday reflecting the paucity of supply, a steadier rates outlook, the rare tenors on offer and, in Berlin Hyp’s case, the green collateral. At the same time VUB mandated leads for a five year covered bond, the first from Slovakia this year.

Sustainability is likely to have a pivotal place in prudential discussions and properties secured on energy efficient mortgages could be in line for more favourable treatment than vanilla ones, the European Covered Bond Council and European Mortgage Federation’s secretary general, Luca Bertalot told GlobalCapital.

Berlin Hyp mandated leads for a rare green Pfandbrief on Monday. The deal has emerged amid a dearth of covered bond supply so far this year and takes advantage of a recent stabilisation in yields at higher levels.